The video is dead now, so I don't know exactly what The Economist was talking about beyond what you quoted. But contra to what that says, the ECB has had a negative interest rate for quite a while. So did the Swiss central bank. And banks still kept their money there...
a recent IMF staff study shows how central banks can set up a system that would make deeply negative interest rates a feasible option.
In a cashless world, there would be no lower bound on interest rates. A central bank could reduce the policy rate from, say, 2 percent to minus 4 percent to counter a severe recession. The interest rate cut would transmit to bank deposits, loans, and bonds. Without cash, depositors would have to pay the negative interest rate to keep their money with the bank, making consumption and investment more attractive. This would jolt lending, boost demand, and stimulate the economy.
When cash is available, however, cutting rates significantly into negative territory becomes impossible. Cash has the same purchasing power as bank deposits, but at zero nominal interest. Moreover, it can be obtained in unlimited quantities in exchange for bank money. Therefore, instead of paying negative interest, one can simply hold cash at zero interest. Cash is a free option on zero interest, and acts as an interest rate floor.
Because of this floor, central banks have resorted to unconventional monetary policy measures. The euro area, Switzerland, Denmark, Sweden, and other economies have allowed interest rates to go slightly below zero, which has been possible because taking out cash in large quantities is inconvenient and costly (for example, storage and insurance fees). These policies have helped boost demand, but they cannot fully make up for lost policy space when interest rates are very low.
One option to break through the zero lower bound would be to phase out cash. But that is not straightforward. Cash continues to play a significant role in payments in many countries. To get around this problem, in a recent IMF staff study and previous research, we examine a proposal for central banks to make cash as costly as bank deposits with negative interest rates, thereby making deeply negative interest rates feasible while preserving the role of cash.
The proposal is for a central bank to divide the monetary base into two separate local currencies—cash and electronic money (e-money). E-money would be issued only electronically and would pay the policy rate of interest, and cash would have an exchange rate—the conversion rate—against e-money. This conversion rate is key to the proposal. When setting a negative interest rate on e-money, the central bank would let the conversion rate of cash in terms of e-money depreciate at the same rate as the negative interest rate on e-money. The value of cash would thereby fall in terms of e-money.
Given that some Nordic countries seem to going cashless, this isn't so outlandish.
And to finally answer your question as to how that ([deep] negative rates) compares to raising the inflation target (from actual IMF study):
In our view, the dual local currency system should be considered alongside alternative
proposals for keeping monetary policy effective at low interest rates, such as a higher
inflation target proposed by Blanchard et al. (2010), or Quantitative Easing (QE). All
current proposals, including the status quo, have pros and cons. In comparison to
alternatives, the dual local currency system has the advantage of completely freeing
monetary policy from a lower bound, allowing for effectively redressing and hence
shortening the duration of recessions. Raising the inflation target and QE do not
remove the lower bound but would shift it downward by some percentage points (Ball
et al. 2016).
So supposedly no more ZLB at all if you negative-interest cash. However, from the Ball source, the negative rate practiced by some central banks didn't transmit well to the rest of the banking system:
The transmission of rate cuts to bank interest rates has been sluggish, as a
resistance of bank deposit rates to go below zero has been evident. This resistance
is not universal. Indeed, banks are charging negative rates to some corporate and
institutional investor deposits in some countries (Shin, 2016). Average deposit rates for non-financial firms in Denmark, for example, are slightly negative, and
bank deposit rates for pension and insurance funds have turned more negative
(Danmarks Nationalbank 2016). In Switzerland, large time deposit rates have
However, there is little evidence so far that banks are passing negative interest
rates through to their retail depositors Insured retail deposits are an attractive
source of financing for a bank in normal times, and a retail customer can often
be cross-sold many other value-added banking products. Banks are reluctant to
lose market share for insured deposits, which they may not easily regain when
interest rates turn positive. Moving to a negative interest rate could be a salient
event that would cause retail customers to ‘shop around’. Given the inertia
normally characterising retail bank relationships, the bank that makes the first
move into negative deposit rates for retail customers could experience a hard-to reverse
loss of market share. Besides, charging interest on retail deposits would
be likely to have a negative impact on the wider public image of banks that
begin to do so. Moreover, banks may fear that retail customers are more likely
to switch from deposits to cash as the interest rate on deposits falls below the
zero rate on cash.
The recent cuts below zero were small, and one would not have expected a
great boost from such timid policy rate cuts if they had happened in positive
territory. The cuts have also been small in comparison to the drops in inflation
expectations that they were responding to, and the associated net drops in real
rates have therefore tended to be even smaller that the nominal rate cuts.21 All
in all, it would be better to describe the interest rate measures of the past couple
of years as having prevented a tightening of monetary conditions and a stronger
slowdown, rather than having represented an actual loosening or an active boost
So, we need bigger (in absolute terms) negative rates. Or so these guys propose. Of course there's the damn cash problem.